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NC State Economist
C O L L E G E O F A G R I C U L T U R E & L I F E S C I E N C E S
North Carolina Cooperative Extension Service
Distributed in furtherance of the Acts of Congress of May 8 and June 30, 1914. Employment and program opportunities are offered to all people
regardless of race, color, national origin, sex, age, or disability. North Carolina State University, North Carolina A& T State University,
U. S. Department of Agriculture, and local governments cooperating.
Agricultural and Resource Economics • September/ October 2001
Nicholas E. Piggott, Assistant Professor and Extension Specialist
Introduction
Section 27 of the Merchant Marine Act of 1920
protects United States flag carriers and shipbuilders
from foreign competition in the U. S. domestic
maritime market. This legislation, referred to as the
Jones Act after Senator Wesley L. Jones, requires
that all cargo moving between United States ports
be carried on U. S. owned and built vessels and
operated by American crews. The law protects
barge operators on the inland waterways, freighters
on the Great Lakes, and deep- sea ocean carriers
serving Hawaii, Alaska, Puerto Rico, and Guam.
Primary justifications for the Jones Act are
that it ensures safety standards, environmental
protection, and the adequacy of the domestic
merchant marine fleet for national security during
times of military crisis. Recently, there has been
serious debate over whether or not the Jones Act
should be repealed. Much of this debate has
focused on national security. Those not favoring
repeal argue that during times of conflict foreign
ship owners may not be willing to risk their fleets to
transport supplies and equipment to troops in
combat overseas. Those who do favor repeal argue
that no Jones Act vessels participated at all during
the Gulf War, and that the Jones Act had to be
partially suspended to ensure that adequate fuel
supplies were maintained for the nation’s defense
( Quartel 1991). Repeal advocates contend that the
security concerns that motivated
the 80- year- old legislation appear to be outdated.
This issue of the NC State Economist
explores the economic arguments surrounding the
debate over the Jones Act. It summarizes the likely
benefits and costs of repeal of the Jones Act, with
special attention paid to what repeal would mean
for North Carolina soybean producers.
Economic Arguments for Jones Act
Repeal
In 1999 the U. S. International Trade
Commission ( USITC) reported “ As of July 1, 1998,
the active Jones Act fleet consistsed of 113 ocean-going
vessels over 1,000 tons....” The same report
stated “ In 1996 all domestic waterborne commerce
covered by the Jones Act, including oeanborne
( coastwise/ intraterritory), lakewise, and inland
shipping, amounted to approximately 1,101 million
short tons of traffice and revenues of $ 7.7 billion.”
The same report estimated that eliminating the
Jones Act would result in a 22 percent reduction in
the price of shipping and result in approximately a
$ 1.32 billion welfare gain to the U. S. economy.
This decline in rates for waterborne transportation
also would likely put pressure on internal rail
freight prices, as these modes of transportation
compete in domestic commerce.
Because of their vested interest in the issue,
agricultural groups have been actively involved in
the debate over Jones Act repeal. At a 1996
hearing of the Subcommittee on Coast Guard and
Maritime Transportation ( of the House Committee
on Transportation and Infrastructure), several
agricultural representatives argued for repeal of the
Jones Act. The president of the American Farm
Bureau, noting the importance of water transporta-tion
to U. S. agriculture in transporting products,
pointed out that the current law undermines the
ability of U. S. farmers to compete with foreign
producers who can move their products in U. S.
markets on competitive foreign vessels.
One key issue for U. S. grain farmers has
been that there are no Jones Act vessels that are
shipping grain from the Mid- West to the Southeast,
thus preventing Southeastern livestock producers
Economic Impact of a Repeal of the Jones Act
for North Carolina Soybean Producers
2 NC State Economist
access to waterborne U. S.- grown grain ( logistical
arguments of the feasibility of this route notwith-standing).
This has meant that on occasion the
Southeastern poultry and pork industries have
resorted to importing foreign grain on foreign-flagged
and owned ships; this has been perceived as
lost sales for U. S. farmers.
At those same maritime hearings, a coali-tion
of eastern North Carolina farmers engaged in
production of livestock and poultry testified that
historically they have relied on rail transportation
originating in the eastern grain belt to supplement
local supplies. While acknowledging that rail will
probably remain the primary mode of grain move-ment
from other states ( for logistical reasons), they
cautioned against over- reliance on one source of
transportation for feeding live animals. They argued
that movement of grain by water would be a viable
transportation alternative, but noted that the only
currently competitive cargo under the current
legislation is foreign cargoes delivered into the port
of Wilmington.
What Is at Stake for North Carolina
Soybean Producers?
North Carolina is a net importer of soybeans
from other states, due largely to the heavy grain
demand of the state’s hog and poultry industries. For
1999, total demand for soybeans in North Carolina
was estimated at 67.5 million bushels. In the same
year, soybean production in North Carolina
amounted to 29.9 million bushels, thus requiring the
import of 37.6 million bushels ( about 58 percent of
total demand).
Because North Carolina imports large
quantities of soybeans to satisfy local demands, the
price of soybeans in North Carolina tends to be
higher than in other states. This is because the cost
of transporting soybeans from outside the state is a
part of the price that North Carolinians must pay for
soybeans. For this reason, North Carolina soybean
producers receive a premium on locally produced
soybeans. If repealing the Jones Act has the effect
of reducing the domestic waterborne rates, and
consequently the internal ( rail) freight rates, then
this will decrease the premium to North Carolina
soybean producers – and hence the price they
receive. This lower price in turn will tend to cause
North Carolina’s soybean producers to supply fewer
soybeans, causing soybean imports into the state to be
a larger fraction of total soybeans consumed in North
Carolina.
Welfare Effects of Jones Act Repeal
Determining the welfare effects of repeal of
the Jones Act requires knowledge of changes in
market prices and quantities demanded and supplied
for different regions. These hinge critically on the
responsiveness of demand and supply to changes in
price – the respective elasticities of demand and
supply. In addition, the magnitude of the price and
quantity changes will also depend on the cost of
transporting soybeans.
A study currently being conducted by Piggott
and Goodwin ( 2001) quantifies what these key param-eters
are so that the welfare effects from a reduction in
transaction costs can be estimated for soybean produc-ers
in different regions. The study uses historical data
and quantitative methods to generate estimates of the
elasticities of demand and supply for both North
Carolina and the rest of the U. S., as well as the magni-tude
of transaction costs involved in importing soy-beans
into North Carolina.
Utilizing a similar but slightly more sophisti-cated
technique used by Goodwin and Piggott ( 2001),
transaction costs involved in trading soybeans between
North Carolina and the rest of the U. S. were estimated
to be 3.64 percent. That is, soybean prices would have
to be at least 3.64 percent higher in North Carolina
than the rest of the U. S. to trigger flows of soybeans
into the state.
Table 1 shows the price, quantity, and welfare
effects from a simulated 22 percent reduction in
transaction costs involved in transporting soybeans
into North Carolina from the rest of the U. S. A 22
percent reduction was simulated following the esti-mated
impact on shipping rates from the USITC 1999
study. The implicit assumption being made in this
context is that we might expect a similar decline in
other modes ( such as rail) as a result of additional
competition. The reduction in transaction costs results
in a $ 0.04 per bushel reduction in the price of soy-beans
in North Carolina, or 0.74 percent based on the
average price of $ 6.676 per bushel. This lower price
September/ October 2001 3
induces a reduction in the quantity supplied of 0.73
percent or about 0.257 million bushels. This
amounts to an annual loss in overall welfare or
producer surplus for N. C. soybean producers of
$ 1.743 million dollars.
On the other hand, exports from the rest of
the U. S. into North Carolina increase by an esti-mated
0.309 million bushels. The simulated price
increase in the rest of the U. S. is very small,
equaling 0.03 percent ( less than $ 0.01 per bushel)
because trade with N. C. accounts for only a small
percent of total soybean demand. However, the
very small non- North Carolina price increase
nonetheless has an impact on both supply and
demand for the rest of the U. S. Simulations
indicate that supply would increase by 0.0046
percent annually, while demand would decline by
- 0.0064 percent in response to this slightly higher
price. While these percentages are small, the
overall impact on producer surplus is significant —
$ 5.790 million — due to the large quantities
supplied. Importantly, the positive impacts of
Jones Act repeal to soybean producers in the rest of
the U. S. outweigh the losses that repeal would
cause to North Carolina soybean producers.
Conclusion
Agricultural producers have been involved in the
recent debate of whether there needs to be reform of the
Jones Act. This article has focused on the impact of
Jones Act repeal on soybean producers in North
Carolina and the rest of the U. S. Not surprisingly, each
group’s stance on Jones Act repeal reflects its own self-interest:
producers outside of North Carolina would
benefit from repeal, while North Carolina producers
would lose.
The estimated price and quantity and subse-quent
welfare effects shown in Table 1 shed light on the
magnitude of these respective gains and losses. The
welfare loss to North Carolina producers of $ 1.743
million represents about 5 cents per bushel, or a little
less than 1 percent of the $ 208 million in average
annual cash receipts of the state’s soybean growers
over the period 1996- 99. At the same time, the esti-mated
net gain to soybean producers elsewhere in the
U. S. of $ 5.8 million exceeds the losses to North
Carolina producers. One implication of this is that
producers in the rest of the U. S. could compensate
North Carolina producers for the losses they would
suffer from repeal of the Jones Act and still achieve
significant positive net benefits – a potentially impor-tant
bargaining point in resolving the political debate
over this issue.
Table 1: Simulated Effects of a 22% Reduction in the Transacti
North Carolina from the Rest of the United States
Before
Units repeal
North Carolina
Supply mill. bu. 35.370
Demand mill. bu. 71.048
Price ($/ bu) 6.676
Rest of the U. S.
Supply mill. bu. 2,841.000 2
Demand mill. bu. 2,805.323 2
Price ($/ bu) 6.442
Change in Producer Surplus ($ million)
North Carolina - 1.743
Rest of the U. S. 5.790
Source: Piggott and Goodwin ( 2001)
NC State Economist
North Carolina Cooperative Extension Service
North Carolina State University
Agricultural and Resource Economics
Box 8109
Raleigh, North Carolina 27695- 8109
4
NON- PROFIT ORG.
U. S. POSTAGE
PAID
RALEIGH, NC
PERMIT # 2353
References
Goodwin B. K. and N. E. Piggott. “ Spatial Market Integra-tion
in the Presence of Threshold Effects.” American
Journal of Agricultural Economics 83( 2) ( May
2001): 302- 317.
N. E. Piggott. and B. K. Goodwin B. K “ Modeling Spatial
Market Linkages with Variable Transactions Costs: A
Repeal of the Jones Act and Impacts on North Carolina
Soybean Producers” Working Paper, Department of
Agricultural and Resource Economics, North Carolina
State University, Raleigh, 2001.
Quartel R. “ America’s Welfare Queen Fleet: The Need
for Maritime Policy Reform”. Regulation 14, 58- 67.
U. S. International Trade Commission. “ The Economic
Effects of Significant U. S. Import Restraints: Second
Update 1999” Publication 3201, Washington D. C. May
1999.
N. C. State Economist
Published bi- monthly by the Department of
Agriculture and Resource Economics and the
Cooperative Extension Service. Address
correspondence to:
The Editor, N. C. State Economist
Box 8109, N. C. State University
Raleigh, NC 27695- 8109
The N. C. State Economist is now on- line at:
http:// www. ag- econ. ncsu. edu/ extension/
economist. htm

NC State Economist
C O L L E G E O F A G R I C U L T U R E & L I F E S C I E N C E S
North Carolina Cooperative Extension Service
Distributed in furtherance of the Acts of Congress of May 8 and June 30, 1914. Employment and program opportunities are offered to all people
regardless of race, color, national origin, sex, age, or disability. North Carolina State University, North Carolina A& T State University,
U. S. Department of Agriculture, and local governments cooperating.
Agricultural and Resource Economics • September/ October 2001
Nicholas E. Piggott, Assistant Professor and Extension Specialist
Introduction
Section 27 of the Merchant Marine Act of 1920
protects United States flag carriers and shipbuilders
from foreign competition in the U. S. domestic
maritime market. This legislation, referred to as the
Jones Act after Senator Wesley L. Jones, requires
that all cargo moving between United States ports
be carried on U. S. owned and built vessels and
operated by American crews. The law protects
barge operators on the inland waterways, freighters
on the Great Lakes, and deep- sea ocean carriers
serving Hawaii, Alaska, Puerto Rico, and Guam.
Primary justifications for the Jones Act are
that it ensures safety standards, environmental
protection, and the adequacy of the domestic
merchant marine fleet for national security during
times of military crisis. Recently, there has been
serious debate over whether or not the Jones Act
should be repealed. Much of this debate has
focused on national security. Those not favoring
repeal argue that during times of conflict foreign
ship owners may not be willing to risk their fleets to
transport supplies and equipment to troops in
combat overseas. Those who do favor repeal argue
that no Jones Act vessels participated at all during
the Gulf War, and that the Jones Act had to be
partially suspended to ensure that adequate fuel
supplies were maintained for the nation’s defense
( Quartel 1991). Repeal advocates contend that the
security concerns that motivated
the 80- year- old legislation appear to be outdated.
This issue of the NC State Economist
explores the economic arguments surrounding the
debate over the Jones Act. It summarizes the likely
benefits and costs of repeal of the Jones Act, with
special attention paid to what repeal would mean
for North Carolina soybean producers.
Economic Arguments for Jones Act
Repeal
In 1999 the U. S. International Trade
Commission ( USITC) reported “ As of July 1, 1998,
the active Jones Act fleet consistsed of 113 ocean-going
vessels over 1,000 tons....” The same report
stated “ In 1996 all domestic waterborne commerce
covered by the Jones Act, including oeanborne
( coastwise/ intraterritory), lakewise, and inland
shipping, amounted to approximately 1,101 million
short tons of traffice and revenues of $ 7.7 billion.”
The same report estimated that eliminating the
Jones Act would result in a 22 percent reduction in
the price of shipping and result in approximately a
$ 1.32 billion welfare gain to the U. S. economy.
This decline in rates for waterborne transportation
also would likely put pressure on internal rail
freight prices, as these modes of transportation
compete in domestic commerce.
Because of their vested interest in the issue,
agricultural groups have been actively involved in
the debate over Jones Act repeal. At a 1996
hearing of the Subcommittee on Coast Guard and
Maritime Transportation ( of the House Committee
on Transportation and Infrastructure), several
agricultural representatives argued for repeal of the
Jones Act. The president of the American Farm
Bureau, noting the importance of water transporta-tion
to U. S. agriculture in transporting products,
pointed out that the current law undermines the
ability of U. S. farmers to compete with foreign
producers who can move their products in U. S.
markets on competitive foreign vessels.
One key issue for U. S. grain farmers has
been that there are no Jones Act vessels that are
shipping grain from the Mid- West to the Southeast,
thus preventing Southeastern livestock producers
Economic Impact of a Repeal of the Jones Act
for North Carolina Soybean Producers
2 NC State Economist
access to waterborne U. S.- grown grain ( logistical
arguments of the feasibility of this route notwith-standing).
This has meant that on occasion the
Southeastern poultry and pork industries have
resorted to importing foreign grain on foreign-flagged
and owned ships; this has been perceived as
lost sales for U. S. farmers.
At those same maritime hearings, a coali-tion
of eastern North Carolina farmers engaged in
production of livestock and poultry testified that
historically they have relied on rail transportation
originating in the eastern grain belt to supplement
local supplies. While acknowledging that rail will
probably remain the primary mode of grain move-ment
from other states ( for logistical reasons), they
cautioned against over- reliance on one source of
transportation for feeding live animals. They argued
that movement of grain by water would be a viable
transportation alternative, but noted that the only
currently competitive cargo under the current
legislation is foreign cargoes delivered into the port
of Wilmington.
What Is at Stake for North Carolina
Soybean Producers?
North Carolina is a net importer of soybeans
from other states, due largely to the heavy grain
demand of the state’s hog and poultry industries. For
1999, total demand for soybeans in North Carolina
was estimated at 67.5 million bushels. In the same
year, soybean production in North Carolina
amounted to 29.9 million bushels, thus requiring the
import of 37.6 million bushels ( about 58 percent of
total demand).
Because North Carolina imports large
quantities of soybeans to satisfy local demands, the
price of soybeans in North Carolina tends to be
higher than in other states. This is because the cost
of transporting soybeans from outside the state is a
part of the price that North Carolinians must pay for
soybeans. For this reason, North Carolina soybean
producers receive a premium on locally produced
soybeans. If repealing the Jones Act has the effect
of reducing the domestic waterborne rates, and
consequently the internal ( rail) freight rates, then
this will decrease the premium to North Carolina
soybean producers – and hence the price they
receive. This lower price in turn will tend to cause
North Carolina’s soybean producers to supply fewer
soybeans, causing soybean imports into the state to be
a larger fraction of total soybeans consumed in North
Carolina.
Welfare Effects of Jones Act Repeal
Determining the welfare effects of repeal of
the Jones Act requires knowledge of changes in
market prices and quantities demanded and supplied
for different regions. These hinge critically on the
responsiveness of demand and supply to changes in
price – the respective elasticities of demand and
supply. In addition, the magnitude of the price and
quantity changes will also depend on the cost of
transporting soybeans.
A study currently being conducted by Piggott
and Goodwin ( 2001) quantifies what these key param-eters
are so that the welfare effects from a reduction in
transaction costs can be estimated for soybean produc-ers
in different regions. The study uses historical data
and quantitative methods to generate estimates of the
elasticities of demand and supply for both North
Carolina and the rest of the U. S., as well as the magni-tude
of transaction costs involved in importing soy-beans
into North Carolina.
Utilizing a similar but slightly more sophisti-cated
technique used by Goodwin and Piggott ( 2001),
transaction costs involved in trading soybeans between
North Carolina and the rest of the U. S. were estimated
to be 3.64 percent. That is, soybean prices would have
to be at least 3.64 percent higher in North Carolina
than the rest of the U. S. to trigger flows of soybeans
into the state.
Table 1 shows the price, quantity, and welfare
effects from a simulated 22 percent reduction in
transaction costs involved in transporting soybeans
into North Carolina from the rest of the U. S. A 22
percent reduction was simulated following the esti-mated
impact on shipping rates from the USITC 1999
study. The implicit assumption being made in this
context is that we might expect a similar decline in
other modes ( such as rail) as a result of additional
competition. The reduction in transaction costs results
in a $ 0.04 per bushel reduction in the price of soy-beans
in North Carolina, or 0.74 percent based on the
average price of $ 6.676 per bushel. This lower price
September/ October 2001 3
induces a reduction in the quantity supplied of 0.73
percent or about 0.257 million bushels. This
amounts to an annual loss in overall welfare or
producer surplus for N. C. soybean producers of
$ 1.743 million dollars.
On the other hand, exports from the rest of
the U. S. into North Carolina increase by an esti-mated
0.309 million bushels. The simulated price
increase in the rest of the U. S. is very small,
equaling 0.03 percent ( less than $ 0.01 per bushel)
because trade with N. C. accounts for only a small
percent of total soybean demand. However, the
very small non- North Carolina price increase
nonetheless has an impact on both supply and
demand for the rest of the U. S. Simulations
indicate that supply would increase by 0.0046
percent annually, while demand would decline by
- 0.0064 percent in response to this slightly higher
price. While these percentages are small, the
overall impact on producer surplus is significant —
$ 5.790 million — due to the large quantities
supplied. Importantly, the positive impacts of
Jones Act repeal to soybean producers in the rest of
the U. S. outweigh the losses that repeal would
cause to North Carolina soybean producers.
Conclusion
Agricultural producers have been involved in the
recent debate of whether there needs to be reform of the
Jones Act. This article has focused on the impact of
Jones Act repeal on soybean producers in North
Carolina and the rest of the U. S. Not surprisingly, each
group’s stance on Jones Act repeal reflects its own self-interest:
producers outside of North Carolina would
benefit from repeal, while North Carolina producers
would lose.
The estimated price and quantity and subse-quent
welfare effects shown in Table 1 shed light on the
magnitude of these respective gains and losses. The
welfare loss to North Carolina producers of $ 1.743
million represents about 5 cents per bushel, or a little
less than 1 percent of the $ 208 million in average
annual cash receipts of the state’s soybean growers
over the period 1996- 99. At the same time, the esti-mated
net gain to soybean producers elsewhere in the
U. S. of $ 5.8 million exceeds the losses to North
Carolina producers. One implication of this is that
producers in the rest of the U. S. could compensate
North Carolina producers for the losses they would
suffer from repeal of the Jones Act and still achieve
significant positive net benefits – a potentially impor-tant
bargaining point in resolving the political debate
over this issue.
Table 1: Simulated Effects of a 22% Reduction in the Transacti
North Carolina from the Rest of the United States
Before
Units repeal
North Carolina
Supply mill. bu. 35.370
Demand mill. bu. 71.048
Price ($/ bu) 6.676
Rest of the U. S.
Supply mill. bu. 2,841.000 2
Demand mill. bu. 2,805.323 2
Price ($/ bu) 6.442
Change in Producer Surplus ($ million)
North Carolina - 1.743
Rest of the U. S. 5.790
Source: Piggott and Goodwin ( 2001)
NC State Economist
North Carolina Cooperative Extension Service
North Carolina State University
Agricultural and Resource Economics
Box 8109
Raleigh, North Carolina 27695- 8109
4
NON- PROFIT ORG.
U. S. POSTAGE
PAID
RALEIGH, NC
PERMIT # 2353
References
Goodwin B. K. and N. E. Piggott. “ Spatial Market Integra-tion
in the Presence of Threshold Effects.” American
Journal of Agricultural Economics 83( 2) ( May
2001): 302- 317.
N. E. Piggott. and B. K. Goodwin B. K “ Modeling Spatial
Market Linkages with Variable Transactions Costs: A
Repeal of the Jones Act and Impacts on North Carolina
Soybean Producers” Working Paper, Department of
Agricultural and Resource Economics, North Carolina
State University, Raleigh, 2001.
Quartel R. “ America’s Welfare Queen Fleet: The Need
for Maritime Policy Reform”. Regulation 14, 58- 67.
U. S. International Trade Commission. “ The Economic
Effects of Significant U. S. Import Restraints: Second
Update 1999” Publication 3201, Washington D. C. May
1999.
N. C. State Economist
Published bi- monthly by the Department of
Agriculture and Resource Economics and the
Cooperative Extension Service. Address
correspondence to:
The Editor, N. C. State Economist
Box 8109, N. C. State University
Raleigh, NC 27695- 8109
The N. C. State Economist is now on- line at:
http:// www. ag- econ. ncsu. edu/ extension/
economist. htm